Question

Assume today is March 16, 2016. Natasha Kingery is 30 years old and has a Bachelor of Science degree in computer science. She is currently employed as a Tier 2 field service representative for a telephony corporation located in Seattle, Washington, and earns $38,000 a year that she anticipates will grow at 3% per year. Natasha hopes to retire at age 65 and has just begun to think about the future.

Natasha has $75,000 that she recently inherited from her aunt. She invested this money in 30-year Treasury Bonds. She is considering whether she should further her education and would use her inheritance to pay for it.9

She has investigated a couple of options and is asking for your help as a financial planning intern to determine the financial consequences associated with each option. Natasha has already been accepted to both of these programs, and could start either one soon.

One alternative that Natasha is considering is attaining a certification in network design. This certification would automatically promote her to a Tier 3 field service representative in her company. The base salary for a Tier 3 representative is $10,000 more than what she currently earns and she anticipates that this salary differential will grow at a rate of 3% a year as long as she keeps working. The certification program requires the completion of 20 Web-based courses and a score of 80% or better at the end of the course work. She has learned that the average amount of time necessary to finish the program is one year. The total cost of the program is $5000, due when she enrolls in the program. Because she will do all the work for the certification on her own time, Natasha does not expect to lose any income during the certification.

Another option is going back to school for an MBA degree. With an MBA degree, Natasha expects to be promoted to a managerial position in her current firm. The managerial position pays $20,000 a year more than her current position. She expects that this salary differential will also grow at a rate of 3% per year for as long as she keeps working. The evening program, which will take three years to complete, costs $25,000 per year, due at the beginning of each of her three years in school. Because she will attend classes in the evening, Natasha doesn’t expect to lose any income while she is earning her MBA if she chooses to undertake the MBA.

1. Determine the interest rate she is currently earning on her inheritance by going to the U.S. Treasury Department Web site (treasury.gov) and selecting “Data” on the main menu. Then select “Daily Treasury Yiled Curve Rates” under the Interest Rate heading and enter the appropriate year, 2016, and then search down the list for March 16 to obtain the closing yield or interest rate that she is earning. Use this interest rate as the discount rate for the remainder of this problem.

2. Create a timeline in Excel for her current situation, as well as the certification program and MBA degree options, using the following assumptions:

   • Salaries for the year are paid only once, at the end of the year.

   • The salary increase becomes effective immediately upon graduating from the MBA program or being certified. That is, because the increases become effective immediately but salaries are paid at the end of the year, the first salary increase will be paid exactly one year after graduation or certification.

3. Calculate the present value of the salary differential for completing the certification program. Subtract the cost of the program to get the NPV of undertaking the certification program.

4. Calculate the present value of the salary differential for completing the MBA degree. Calculate the present value of the cost of the MBA program. Based on your calculations, determine the NPV of undertaking the MBA.

5. Based on your answers to Questions 3 and 4, what advice would you give to Natasha? What if the two programs are mutually exclusive? That is, if Natasha undertakes one of the programs there is no further benefit to undertaking the other program. Would your advice be different?

Answer 1

30 year yield = 2.74%

Certification program:

Age	Salary	Discount factor
30	0	1
31	0	0.973331
32	10609	0.947373
33	10927	0.922107
34	11255	0.897515
35	11593	0.873579
36	11941	0.850281
37	12299	0.827605
38	12668	0.805533
39	13048	0.78405
40	13439	0.76314
41	13842	0.742788
42	14258	0.722978
43	14685	0.703697
44	15126	0.68493
45	15580	0.666663
46	16047	0.648884
47	16528	0.631579
48	17024	0.614735
49	17535	0.59834
50	18061	0.582383
51	18603	0.566851
52	19161	0.551734
53	19736	0.53702
54	20328	0.522698
55	20938	0.508758
56	21566	0.495189
57	22213	0.481983
58	22879	0.469129
59	23566	0.456618
60	24273	0.44444
61	25001	0.432587
62	25751	0.42105
63	26523	0.409821
64	27319	0.398892
65	28139	0.388253
PV of salary differential	356384.8

NPV = 356394.8-5000 = 351394.8

MBA program

Age	Salary	Discount factor
30	0	1
31	0	0.973331
32	0	0.947373
33	0	0.922107
34	22510	0.897515
35	23185	0.873579
36	23881	0.850281
37	24597	0.827605
38	25335	0.805533
39	26095	0.78405
40	26878	0.76314
41	27685	0.742788
42	28515	0.722978
43	29371	0.703697
44	30252	0.68493
45	31159	0.666663
46	32094	0.648884
47	33057	0.631579
48	34049	0.614735
49	35070	0.59834
50	36122	0.582383
51	37206	0.566851
52	38322	0.551734
53	39472	0.53702
54	40656	0.522698
55	41876	0.508758
56	43132	0.495189
57	44426	0.481983
58	45759	0.469129
59	47131	0.456618
60	48545	0.44444
61	50002	0.432587
62	51502	0.42105
63	53047	0.409821
64	54638	0.398892
65	56277	0.388253
		672516.1

PV of cost of MBA program

Age	Cost	Discount factor
30	-25000	1
31	-25000	0.973331
32	-25000	0.947373	-73017.6	>>PV of Cost

NPV of MBA = 599498.5-73017.6 = 526480.9

NPV is much higher in the case of MBA program. Hence, I would suggest MBA course to her